Are Singapore Stocks Poised For A Decline?

Editor’s note: Earlier versions of this article were first published on 22 January 2018 in The Motley Fool Singapore’s premium stock recommendation newsletters, and in the 22 January 2018 edition of Take Stock Singapore.

As of 15 January 2018, Singapore’s stock market benchmark, the Straits Times Index (SGX: ^STI), closed at 3,536 points. For those with a good memory, our market benchmark was also above 3,500 points back in April 2015. But, stocks fell sharply afterwards, with the index falling by 28% from a high of 3,540 points (reached on 15 April 2015) to a low of 2,533 points (reached on 21 January 2016).

With this as a backdrop, what can investors expect next? I’d like to address this today. And I intend to discuss this not by talking about arbitrary price levels, but by looking at valuations.

The CAPE Of Good Hope

One useful metric to understand how expensive or cheap stocks are is the cyclically-adjusted price-to-earnings ratio, or CAPE ratio. The ratio, which was popularised by the Nobel Prize-winning economist Robert Shiller, divides a stock’s price by the average of its 10-year inflation-adjusted earnings.

(As a side-note, a similar ratio was also used by the legendary investor Ben Graham decades ago; Graham’s version used a stock’s 10-year average earnings without adjusting for inflation.)

According to British banking juggernaut, Barclays, Singapore’s stocks (as represented by a broad-based Singapore-focussed index maintained by MSCI) had a CAPE ratio of 16.9 as of 29 December 2017.

If we use the Straits Times Index as a close substitute for the aforementioned MSCI index (a reasonable assumption to make, in our view), then Singapore’s stocks had advanced by 3.9% from 29 December 2017 to 15 January 2018. If we further assume that the earnings of Singapore’s stocks had not changed in that period (which is another reasonable assumption), it means that the CAPE ratio for the local stock market was 17.5 as of 15 January 2018.

What Can Value Tell Us

On its own, a CAPE ratio of 17.5 seems arbitrary. What does it actually say about Singapore’s stocks? Let’s look back at history for some insight. Here’s a chart showing the CAPE ratio for our local market going back to December 1981:


There are a few important observations I have about the chart. Firstly, a CAPE ratio of 17.5 is towards the lower end of where the ratio has been for Singapore’s stocks for a period of over 35 years. The chances of local stocks producing a good outcome over the long-term are, thus, in our favour. This brings me to the second observation.

The chart immediately below compares the Straits Times Index’s annual returns against its starting CAPE ratio for a five-year holding period:

Source: Barclays; S&P Global Market Intelligence; author’s calculations

(There are a few caveats regarding the chart. Firstly, I had used data on the Straits Times Index going back only to May 1992 because that’s the earliest date that I can get pricing data from my provider. Secondly, I used the CAPE ratios for Singapore stocks provided by Barclays, which was built on pricing data on a MSCI index for Singapore stocks, as mentioned earlier; I had assumed – reasonably, in my view – that the Straits Times Index had the same CAPE ratios across time as the MSCI index.)

You can see that there’s a clear theme with my returns-vs-CAPE chart: Buy stocks when they’re cheap – when they have a low CAPE ratio – and you’d likely end up with a good outcome; buy them when they’re pricey – when they have a high CAPE ratio – and you’d have poorer odds of ending up with a profit. This is why I mentioned earlier that the “chances of local stocks producing a good outcome over the long-term are thus in our favour.”

The third observation has to do with CAPE ratios around the world. Singapore, as I had already mentioned, had a CAPE ratio of 16.9 on 29 December 2017. This makes our local stock market one of the cheapest in the world. Here’s a table showing the CAPE ratios of 25 countries, including Singapore, as of 29 December 2017:


Investors who are looking for bargains at the individual-stock level in Singapore might be happy to know that we are one of the cheapest markets in the world. But here’s an important caveat, which is my fourth observation: Individual stocks can move completely differently to the market.

If you look at the first chart, you might notice that Singapore’s stocks had a really low CAPE ratio of around 12 in early 2009. To be exact, the CAPE ratio was 12.4, on 31 March 2009. For the five-year period from 31 March 2009 to 31 March 2014, the Straits Times Index produced a strong annualised return of 13.3%. But here’s the rub: Of the 477 primary Singapore-listed stocks S&P Global Market Intelligence has data on today that were listed back on 31 March 2009, 110 of them – or 23% – had negative annual returns over the next five years. That’s a pretty astonishing number.

Some shocking examples are Pine Capital Group Ltd (SGX: ADJ), Shinvest Holding (SGX: BJW), Advanced Systems Automation Ltd (SGX: 5TY), Infinio Group (SGX: 5G4), and Arion Entertainment (SGX: 5VU).

Source: S&P Global Market Intelligence

This goes to show why it is important to have the right framework when picking individual stocks. A rising tide does not lift all boats. In The Motley Fool Singapore’s stock recommendation services, thinking about the right investing framework is something we do all day.

Some Parting Words

It’s natural to be worried that the market is frothy, given that the last time the Straits Times Index closed above 3,500 points, it subsequently declined sharply before recovering. But as I’ve just explained, the Singapore stock market has a reasonable valuation now, which puts the odds of long-term investing success in our favour.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore writer Chong Ser Jing does not own shares in any companies mentioned.